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When you’re starting out as a young investor, it can be hard to know where to begin. The good news is that you’re in the best position to maximize your savings — you have time on your side. By sticking with the right strategy, you can build a healthy nest egg and enjoy a comfortable retirement. Here’s how.

How to build wealth by investing

Socking cash into a savings account may feel like a step in the right direction, but even if the account is earning a little bit of interest, it’s likely not outpacing inflation. That means that over the years, your savings could lose value. Smart investing allows your savings to grow over time.

1. Start early

In other words, start right now. No matter how little you can put away at this moment, the sooner you start investing, the better off you’ll be. That’s because compounding returns are more potent over time — as your investments grow, your savings grow, and as your savings grow, you have more money invested. It’s a powerful cycle.

“The most important thing is to start early and consistently invest, consistently save, so that it becomes a habit for you,” says Carol Fabbri, a certified financial planner in Conifer, Colorado. “If you start when you’re 20 or 25, when you get your first job, you’re going to be amazed at how much you accumulate.”

2. Take advantage of your employer’s benefits

If your company offers a retirement plan such as a 401(k), sign up. Having money taken out of your paycheck before you see it (and spend it) is one of the most effective ways to save for retirement. You won’t have to decide to save — it will just happen automatically on pay days. Plus, your contribution comes out of your paycheck pre-tax, lowering your taxable income and allowing you to delay paying taxes on the money until you take distributions in retirement.

And steady contributions win the race, research shows. According to data from the Investment Company Institute, the average 401(k) balance for people who consistently saved from 2010 to the end of 2016 more than doubled, growing at a compound annual average growth rate of 14.2%.

3. Maximize any employer match available

Many companies offer a 401(k) match based on your own contribution, such as 50 cents for every dollar you contribute, up to 6% of your salary. That means if you’re only contributing 4% of your salary annually, you’re missing out on free money since you’re not getting the full match.

It may not seem like much, but that match can add up. Consider a worker who earns $50,000 a year and her employer matches 50 cents to every dollar she saves, up to 6% of her salary. If she saves 10% to her 401(k), or $5,000, that means her employer contributes $1,500 per year for her retirement.

If both the employee and the company continue to contribute the same amount and the employee earns 6% on her investments, she will have more than $90,000 in 10 years. Without the employer match, however, she’d have just under $70,000.

4. Save as much as you can

The more you can invest, the more money you have working for you. In 2019, you can put up to $19,000 into a 401(k), or up to $25,000 if you’re 50 or older. Additionally, you can put another $6,000 into an IRA, or up to $7,000 if you’re 50 or older. And when it comes to taxable accounts, you can save as much as you want.

“We usually preach that you’re a good saver if you’re saving 10% of your gross income, and you’re a great saver if you’re saving 20%,” says Nate Creviston, a certified financial planner in Cleveland. If you can’t quite meet those goals yet, consider having your 401(k) contribution bumped up a percentage point every six months until you get there, or boost it every time you get a raise.

If you’re saving outside a retirement account, consider setting up automatic transfers from your checking account to your investment account on paydays — then set a calendar reminder to bump up the amount every six to 12 months.

5. Pay attention to fees

If you’re saving regularly but paying high fees on your investments, you’ll see lower returns — and a smaller nest egg in the end.

“Historically, fees are what changes the retirement outcome for people,” Creviston says. “We always suggest our clients find out what those fees are.”

Within employee retirement accounts, employees usually have little control over most of the fees. But you should absolutely check the fees on the investments available to you. Pay attention to the expense ratio, which is how much it costs to run a fund each year; the higher that ratio is, the more that fee will eat into your returns. When you have a choice between two similar funds with differing expense ratios, it may make sense to choose the one that costs less.

Outside of retirement accounts, there are other investment fees to watch for. Some investments may hit you with front-end sales loads, which are fees charged when you purchase assets. You may face surrender fees on some investments if you sell them within a specific period of time. And if you’re working with a financial advisor, there are advisory fees to be aware of — your advisor may charge by the hour, by the project or by a percentage of your portfolio, for example. The more you’re cognizant of what fees are on the table, the better you can make decisions to minimize costs overall.

6. Don’t cash out early

If you take money out of a 401(k) early, you’ll owe income taxes on the balance plus a 10% early withdrawal penalty, both of which could hurt your bottom line.

Even for non-retirement accounts, pulling out cash unnecessarily could have dire effects; you lose the growth potential of that money. If you have $5,000 in an investment account when you’re in your 20s and earn 6% returns, over 35 years that money would grow to roughly $40,000 — without another dollar invested. Withdraw some of that cash and your earning potential dwindles.

For best results, sock money away and leave it there as long as you can, unless it’s earmarked for shorter-term goals such as a down payment on a home or college expenses.

7. Rebalance regularly

Over time, as some investments perform better than others, your balanced portfolio may become somewhat skewed. For instance, if you were originally invested in 85% stocks and 15% bonds at the beginning of the year, you might be in 92% stocks and 8% bonds by the end. While that means your stocks are doing well, it also puts you in a riskier position, because more of your holdings are in equities. If you maintain a riskier balance and the market drops, you could lose more of your nest egg than you’d like.

It’s wise to review your allocation about once a year to keep your investment plan on track and ensure that you’re not taking too much risk. In this case, that would mean selling some stocks and buying some bonds to return your portfolio to the initial ratio. (Bonus: This strategy means you’re essentially selling high and buying low — and isn’t that the point?)

8. Revisit and update your portfolio as needed

Just like the car you drove when you were 18 probably isn’t the car you’ll drive when you’re 50, your investment needs will evolve over time. You will likely need to adjust your portfolio to become more conservative as you get closer to retirement age or to accommodate other priorities that affect what you do with your savings.

Additionally, your investments may change as fund managers leave or as companies tweak a fund’s mix. Examining your portfolio regularly allows you the chance to drop investments that have gotten too expensive or those that are on a trajectory you’re not loving anymore.

You will learn more about investing — and what you want from it — over time, leading you to make decisions that can put you in a better position. If you have questions about the right portfolio for you, a financial advisor can help you assess your current holdings and make the best plan for the future.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

The views and opinions expressed herein are those of the author and may or may not represent the views of Capital Analysts or Lincoln Investment.Articles are not written or produced by the named representative and the information has not been verified. There is no guarantee as to the completeness or accuracy of the content. Quotes and remarks have been excerpted from conversations with the interviewer and may have been taken out of context. All remarks are hypothetical in nature and are intended to be informational only. They should not be regarded as investment advice, performance claims or testimonials. This is not a solicitation, recommendation or endorsement of any investment, investment strategy, tax strategy or legal advice. There is no guarantee that any strategies discussed will result in a positive outcome or the achievement of financial or retirement goals. A plan of regular investing does not assure a profit or protect against loss in a declining market. You should discuss any legal, tax or financial matters with the appropriate professional. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal.

The examples in sections 2, 3 and 6 are for illustrative purposes only. The illustrations are hypothetical analyses that are calculated using single compounded rates of return which is highly unlikely as rates will vary over time, particularly for long-term investments. The illustrations do not reflect the performance of any specific investment and do not take into concern any investment fees, expenses or taxes, which may lower performance. Neither asset allocation nor diversification guarantee a profit or protect against a loss. 3/19

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